Venture Capital
VC Firm
- Venture Capital Firm
- Varies between countries
- Invest in a venture capital fund
- About 1k VC firms in the US.
- Very difficult for those without a proven track record as entrepreneur or investor to form a VC form.
- Two-thirds of the VC firms only launched one fund.
- Venture capital prefers CSE, prefers software even more.
- VC prefers 2B businesses.
- General Partners
- Decides the industry to invest in
- Normally 5 to 8 GPs, could be 1
- Arguments: should carried interest be subject to ordinary income or long term capital gain?
- VC Firm and GPs seek to raise a fund.
- May also put money in.
- Receives annual fee, typically 2% of the value of the fund.
- Also receives carry, a percentage of net profit (typically 20%)
- Originates from sailing: you pay 20% commission for whatever carried in the ship.
- Spend half of their time recruiting management and serving as directors/monitors.
- Limited Partners
- Put money into the pool of fund.
- Must wait for 10 to 12 years to see the return.
The Profit
- Aims for 25% to 35% of profit yearly over the life time of the VC fund.
- A small number of VC funds generates the biggest return (multiple times)
- Vast majority of return is generated by a few successful companies
- Even the best VC firms, they lose money in 40% of the investments.
- Every investment must have the potential to be the home run!
Picking the Winners
- Ideas are more malleable than people.
- Large addressable market size.
- Look for startups that grow exponentially without diminishing the marginal costs.
- Look for unfair product, business model, and culture.
5 Essential Elements that Lead to Success
- Ideas
- Team
- Business Model
- Funding
- Timing (most importatn)
The Process
- VC Firm & GP seek to raise a fund
- GP selects startups
- GP manages fund and more investments over fund life
- GP manages IPO or purchase “exits”
- Money were distributed among GP, LP, and other investors.
Limited Partnership: What It Is, Pros and Cons, How to Form One
From Founder and Early Team Point of View
- Venture Funding Lifecycle
- Discovery - Grants, Competition, Credit Cards
- Validation - Crowd Sourcing, SBT, SBI
- Customer Creation - Angels, Seed Funds
- Company Building - Venture Capital
- Founder equity splits
- Founders’ Agreement Template
- one-year cliff, four-year vesting
- Founder’s Agreement
- Capitalization Table
- Minimum Viable Product (= MVP)
- Stock Options
- Incentive
- Non-statutory
Resources
- 5 charts: Startups feel the squeeze in Q3 | PitchBook | 2023
- “The ratio of capital demand to supply has skyrocketed to its highest level in over a decade for later-stage startups.”
- IPO freeze, investors leaving the VC field, leading to a investors’ market for VC funding.